Court Hearing Approaches on Whether to Allow Mine’s Expansion BULGA, Australia—For 30 years, the coal mined in this remote Australian town has fired power plants as far away as Tokyo and Shanghai. More recently, it has been generating heat of a different kind: local opposition to a mining project that would feed Asia’s demand for resources.

Rio Tinto RIO.LN +0.77% PLC is fighting to salvage plans to expand a coal mine near Bulga in New South Wales state—among the company’s biggest in the country—after losing the first round of a legal challenge brought by residents who claimed dust and noise from the project would wreck their community. Rio Tinto has warned that 1,300 jobs could be at risk if its appeal—due to be heard from Wednesday—fails in a Sydney court.

Mining officials say more than Rio Tinto’s proposed investment of 600 million Australian dollars (US$552 million) is at risk in the dispute. Australia accounts for one-third of global coal exports, but the industry is under stress as China’s cooling economy sends prices of the fuel to three-year lows. Already 10,000 coal-mining jobs have been lost as companies such as BHP Billiton Ltd. BHP.AU +2.42% and Glencore Xstrata GLNCY +0.80% PLC respond to weaker demand by closing mines or cutting output.

“We’re currently in the fight of our lives in the coal industry,” said Harry Kenyon-Slaney, chief executive of Rio Tinto’s coal business.

In Australia, Rio Tinto is focusing on expanding mines such as its Warkworth operation near Bulga because they are cheaper than building new ones, which require infrastructure such as water supply and rail lines. The company also wants to sell several assets to reduce costs, including a stake in the Coal & Allied unit that houses its New South Wales coal pits.

For residents like 62-year-old Stewart Mitchell, whose ancestors founded Bulga in the 1820s, the recent troubles of the coal industry shouldn’t trump local concerns over increased mining.

Rio Tinto’s plan to extend mining at Warkworth by 12 years through 2033 would bring an additional 144 million tons of thermal coal used in power generation on to the global market—enough to cover Japan’s imports for a year.

But it would also bring the mine to within two miles of Bulga, where 350 people live, and require clearing of endangered ecological areas and destruction of Saddleback Ridge, the last natural buffer between the town and the mine.

“It sounds like a tractor in the yard beside you—it’s that loud,” Mr. Mitchell said. “We’re forever cleaning black dust off any surface inside. It gets on the roofs and washes into the rainwater tanks. We shouldn’t be expected to live under these conditions.”